Recent News and Reports on China
by Marc Lerner
Several recent reports and articles have come out regarding the economy of China. The first of these is by Michael Pettis, one of the best commentators who analyzes China. Pettis argues that the recently-announced reforms in China, if implemented successfully (a big if, given the difficulty of challenging the political status quo in China) will inevitably slow growth in China as the country transitions from a massive and wasteful investment boom to a consumption-led growth model that will allow the household sector to consume more of the country’s production. This contrasts with the mainstream view, which holds that such reforms will boost productivity and keep growth at its current highs of 7-8%. Pettis argues that there are three reasons why this is the case: the investment-led growth has been fuelled by “tremendous” credit expansion, and as the reforms bring on deleveraging it will necessarily decrease demand; Chinese banks have to recognize bad debts one way or another and as the misallocated and uneconomical investments are brought to light this process will act as a drag on economic growth; and a reversal of the current growth model will necessarily slow growth rates as imbalances such as excess manufacturing capacity brought on by the boom have to be dealt with. Pettis concludes by saying that if growth does not slow over the coming months and years, this simply must mean that China has not implemented the necessary reforms, and is continuing down the same path of credit-fueled investment.
Along a similar theme, famous investor George Soros wrote in an essay on the world’s economic challenges that China is the major uncertainty facing the world today, and that there is an “unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.” All these problems seem to finally be catching up with China: recent manufacturing data, for example, has disappointed. Whether this is the beginning of the end for the Chinese credit boom or whether they will continue to leverage and build more we cannot be sure of, but it is certainly a symptom of the underlying problems.